Aftermarket Supply Chain Design

Association for Strategic Planning

Annual Conference
February 2007
James B. Ayers, Principal
CGR Management Consultants
Los Angeles, CA
jimayers@cgrmc.com
(310) 822-6720

Background & Purpose

This report describes the process and results of a strategic transformation effort at Bombardier
Transportation Services (BTS).1 It describes a company team effort to define a strategic direction and then
build an operation that supported that direction.
Bombardier is based in Montreal and markets both aerospace and rail products. Its annual sales are about
US$14B. Bombardier Transportation is the world’s largest manufacturer of locomotives and coaches with
revenues of $6.3 billion. This is comprised of $4 billion in rolling stock sales, $1.3 billion in aftermarket
services through BTS, and $1 billion in systems and signaling. At the time of the case in 2002, the market
for BTS products was expected to grow at 23% annually. Growth drivers included privatization of fleets
and the need to run rail lines cheaper. Effective materials management, as described in this paper and the
accompanying presentation, was key to enabling growth in the service businesses.
The effort sought strategic advantage in aftermarket services from the design of more focused supply
chains to deliver services. The effort was lead by a new Vice President Material and Logistics (M&L) hired
to “turn around” what had been considered an under-performing business unit. M&L was the purchasing
arm of BTS responsible for global purchasing in the aftermarket in Europe and Asia. Its customers were
both external (rail lines) and internal (other divisions that needed material).
Rob Smith, M&L’s Vice President, led the transformation. Jim Ayers, CGR Management Consultants,
facilitated the effort that began in August 2002. The presentation from which this paper was drawn was
presented at Supply-Chain World in Atlanta in April 2003 sponsored by the Supply-Chain Council, an
international organization. This paper also reports the state of BTS today, specifically how it markets the
expanded services that have flourished as a result of the effort.
From a strategic planning process point of view, this paper communicates how M&L achieved a
“marriage” between strategy and operations. The process included the tools and methodologies employed
and the participation of managers affected by the change. In particular, the strategy produced “operational
innovations” that created new processes focused on tailored rather than one-size-fits-all supply chains.
(Slide 2) The Bombardier team employed Michael Porter’s Activity System approach in facilitated sessions
to design these innovations.

About BTS & M&L

Bombardier Transportation in Europe was built around an acquisition of Adtranz, a joint venture of ABB
and DaimlerChrysler in late 2001. Adtranz, in turn, had been the product of acquisitions of mostly national
rail lines throughout Europe. As a result, its fleets had multiple vehicle types, manufacturing facilities,
warehouses, and material requirements. In fact, BTS served customers in 16 countries in Europe plus others

1
Applicable slides are referenced throughout the paper. Some presentation slides are also included as
Figures.

1
in Asia. The Bombardier product line included both long-range intercity stock and vehicles used in local,
light rail transit. (Slides 4, 5, 6)
At the outset of the project, M&L provided material purchasing services to a number of “customers.” These
included other divisions in BTS and external customers – mostly rail operators. Internal customers included
the Fleet Business and Vehicle Repair & Overhaul (VRO). Fleet was an outsource provider serving
operators wishing to off load the maintenance of their fleets. VRO bid on “projects” to perform periodic
overhaul, repair, and upgrades on multiple vehicles of a similar type. Project contracts often covered
dozens of vehicles that would be refurbished or brought up to date in terms of mechanical systems and
coach interiors. Fleet and MRO provided the manpower to meet their customers’ needs and relied on M&L
for material.
Customers also made “ad hoc” requests for particular parts, often part of a search for the lowest price.
Many of these parts were hard to find in light of the large number of vehicle models supported. Often, an
order for such parts would trigger a search for the part in BTS warehouses and other sources. Notably these
sources included what the company called OEMs. These were the original equipment manufacturers for
vehicle subsystems. Subsystems included propulsion, brakes, ventilation, controls, and wheel assemblies
called bogies.
Another source of parts was refurbished parts from the Component Repair & Overhaul (CRO). This unit,
operating in the UK, remanufactured parts removed by maintenance or overhaul crews. CRO served as
another source of parts. (Slide 7)

Challenges
There are many players in the rail vehicle supply chain. Bombardier acted as a “system integrator” in
designing and delivering its new build products. Figure 1 identifies player roles. (Slide 8)
New Build vehicles were comprised of subsystems
from OEMs. Bombardier factories also Figure 1. Players in the Supply Chain
produced some subsystems and parts.
Operator’s maintenance services
When a new vehicle was designed,
VRO
VRO Fleet
OEMs were encouraged to bid low to Distributors
Fleet

have their product included on the 3rd party CRO

vehicle. A “carrot” was the profitable parts M&L
M&L
CRO

aftermarket business. The supply chain (aftermarket

(aftermarket parts)
for New Build is show in the lower left OEM OEM
parts systems
hand corner of Figure 1.
Bombardier
After the warranty period, the OEMs and parts
M&L became the primary parts Bombardier
new build
providers. In effect, as shown in the Bombardier Transportation Services (BTS)
New Vehicles
upper left hand corner of Figure 1, M&L Aftermarket flow
competed with the OEMs as well as with Operators (national/private) New Build flow

independent parts distributors. The figure

also shows paths to the Operators
Maintenance Services through VRO and Fleet organizations.
M&L had aligned itself geographically, not by service line. (Slide 10) Customer-facing functions were
located in Sweden, the UK, and Germany. Operational Procurement was located in Germany and the UK.
M&L’s staff numbered about 400 employees. This arrangement was natural since the organization had
grown by combining national systems. But there was dissatisfaction with M&L on the part of its VRO and
Fleet customers. In fact, most measures of M&L profitability were tied to profits on ad hoc parts, not the
quality of their services to VRO and Fleet.
Physical distribution depended on about two dozen warehouses placed around Europe. These were legacy
facilities from the roll up of independent rail operators. The configuration was certainly not designed as the
current centralized BTS would design it if it could do so from scratch. A barrier to closing facilities was
opposition from governments bent on preserving local jobs.

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A new maintenance service product on the horizon was the Material Service Agreement (MSA). The MSA
was an initiative from Deutsche Bahn (DB), Germany’s chief railroad. In this arrangement, Bombardier
would assume responsibility and liability for parts availability to maintain vehicle availability. The liability
came from vehicles not being available for service due to missing parts. Providing such a service would
require considerable support from the BTS Engineering organization to document selected vehicles. But
this organization was more focused on redesigning systems. (Slide 11)
In summary, M&L had multiple challenges. (Slide 12) These included improving customer services,
instituting improved inventory management, collaboration with its internal customers, and rationalizing its
physical distribution.

Technical Approach Figure 2. Relationship Between Spheres & Activity Systems

After a six week introduction to the

organization, Rob Smith decided to move ahead
with improvements. (Slide 13) Bombardier had a
Six Sigma effort under way that prescribed Theme
Theme 11 Theme
Theme 22

methods for conducting improvement teams. The

effort also included techniques recommended in Sphere A
Jim Ayers’ Handbook of Supply Chain
Management.2 These techniques included spheres, Activity
Activity
Theme
Theme 44 Theme
Theme 33
or businesses inside the business”, and activity
systems.
Process
Process 11
Process
Process 22
Sphere B
Spheres are market-product-operations Process
Process 33

combinations that play a role that is similar to the

Sphere C
role segmentation plays in marketing strategies.
The need for identifying spheres arises when one
single supply chain can’t meet the needs of all the company’s products or markets. Application of the tool
often defines multiple supply chains to serve distinct businesses. Figure 2, which is not in the presentation,
shows the relationship between spheres, activity systems, and processes. The method first identifies
spheres, then designs an activity system for each sphere that, in turn, points out needed processes.
Another tool, used for self-assessment, was the supply chain Maturity Matrix. (Slides 14 & 15) M&L staff
took pains to complete this assessment in advance of the meeting. Most of the seven assessments ranked
M&L low in maturity – at Stage 1 or 2. Another self-assessment relied on the Supply-Chain Operations
Reference Model, or SCOR. Members of the Council maintain SCOR voluntarily. Of particular value is
SCOR’s list of Enable processes. The presence or lack of enabling processes in a company reflects
readiness to manage complex supply chains. Several enable processes were viewed as weak or all together
absent. (Slide 16)
Because the changes required new processes, assignment of people to new positions had to follow quickly
to meet the deadlines set for Mr. Smith. Although the sphere concept doesn’t necessarily have to
correspond with organization realignment, they did so in the case of M&L. The sequence for defining the
strategy and implementing an organization was the following: (Slide 17)
1. Identify the “businesses within the business.”
2. Define the activities needed to be successful.
3. Make organization changes required to implement the strategy.
4. Implement the process changes, giving those who have to manage them the chance to design them.
This process began with an off site meeting lasting five days. Internal customers and sales executives
provided the customers’ perspectives. This was followed by a discussion of the team’s inputs from the pre-

2
Ayers, James B. Handbook of Supply Chain Management, Second Edition, New York: Auerbach
Publishers, 2006.

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meeting surveys. Finally, the team identified “businesses within the business” worthy of distinct supply
chains.

Outcomes
The outcomes described here represent the plan as of 2003. The Figure 3. M&L Spheres
plan has changed with the passage of time. However, the basic
strategy of targeted supply chains remains in tact. The team Parts
approved five spheres as shown in Figure 3. Parts, Solutions,
and Projects corresponded with the three principal paths to the
market – ad hoc parts, maintenance, and overhaul, and repair Solutions

Enable
projects. The Returns sphere was an acknowledgement that, as
identified in part by the response to the Enable process
assessment, BTS could capture value by performing more parts Projects
refurbishment.
The Enable sphere, which served the other spheres, contained Returns
many activities that were absent from the current M&L
infrastructure. These included addressing the excess warehouse
capacity, human resources, performance measures, finding strategic suppliers (sourcing), and Six Sigma
process improvement.
As noted above, sphere definition requires three components: markets-products-operations. The Projects
sphere was defined as follows: (Slide 19)

Markets Products Operations

Large fleets, any vehicle Material support for repair Tailored material supply & logistics for
type, VRO & overhaul projects overhaul-repair-refurbishment-modifications
projects, material purchasing, kitting, & staging

Projects were just as the name implies. They were separately contracted with a defined scope and had a
beginning and an end. This definition took into account its partner operating division, VRO, which
provided the work forces for these projects. This inclusion didn’t preclude offering material services for an
operator using its own labor force. Note that the Market definition targeted larger fleets that needed larger
projects. The vehicles didn’t have to be Bombardier vehicles; the skills required were the same regardless
of vehicle origins. The product, defined as “material support” involved multiple operations listed under
Operations.
Members of the team put together Activity Systems for each sphere. The Project Activity System was of
particular interest, since projects at the time accounted for the most material purchased –about $400 million
yearly. The Activity System process calls for the following steps:
1. Make strategic choices, called themes. These “anchor” the strategy. A company that doesn’t make
choices has no strategy. Deciding what not to do is as important as what to do.
2. Define “activities” that support the strategies. These are clusters of related processes needed to
implement the strategy.
3. Establish “links” between the activities and the themes. The network of links provides hard-to-
copy advantage. Competitors may copy one or two activities but can’t duplicate entire network.
The Project activity systems, shown in Figure 4, had two halves – one for pre-tender bidding (yellow
activities) and another for executing on successfully sold projects (blue activities). This was an operational
innovation since none of the pre-tender activities had existed prior to the effort. (Slide 20)

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The four themes anchoring the Projects strategy were:
Figure 4. Projects Activity System
• Full VRO Support. M&L had been reactive to VRO Subcontract
opportunities. The new philosophy would assign Local Geographic
engineering support
Risk
content resources
dedicated project managers at the pre-tender stage to Marketing &
analysis

support the bidding process. Limited, chosen

sales support
Risk management
feasibility
locations
• Risk Management Feasibility. Repair and overhaul Project
management

contracts were often fixed price. This reality Logistics

Purchasing &
expediting Early tender
Project Pre-Tender

required an analysis of associated risks, including capability involvement

Standard
Project Post-Order solutions
those that went with the cost of materials. Supplier
network

• Limited, Chosen Locations. This choice Performance

at low cost
Full VRO
support
acknowledged that BTS was better positioned to Engineering
support

perform contracts in some places and less so in

others. Factors included geographic closeness, language, and facilities for staging materials. Another
factor considered was whether the contract required local content. This was common since the
customers were often government agencies.
• Performance at Low Cost. Being cost effective required engineering support, reliable sources of
material supply, and efficient logistics. Projects had to be carefully orchestrated; an idled workforce
with no material was expensive. So good logistics and local suppliers for commodity materials were
keys to cost performance. One component was to have material suppliers share project risks.
As noted above the first steps in implementing the strategy involved making organization changes.
Notably, the Project Management, Material Solutions, and Sourcing units were established. Existing
employees assumed Material Solutions and Sourcing roles; a new hire became responsible for Project
Management. Another enabler was deployment of the Balanced Scorecard for performance measures.
(Slide 27) The scorecard includes Financial, Customer, Learning and Growth, and Internal Process
perspectives. Since the implementation, the business has enjoyed profitability and growth. In one year
profits eclipsed all the rest of Bombardier. This was probably due to adversities elsewhere but also to
effective execution of the strategy.

BTS Today
As of January 2007, BTS presents it self on its website3 as follows:
We want to meet every single one of our customers' rail support needs. In fact, we want to do
more than meet them - we want to surpass them. So, we've developed an exclusive product
portfolio that details exactly what we do offer around the globe.
Related BTS services are four, summarized in the following table:
Category Services
Fleet Maintenance Warehouse services, maintenance, material
management, damage repair, failure reporting
Operations & Maintenance Services Designing & equipping maintenance facilities, training
client staff, operating manuals, business processes
Vehicle Refurbishment & Modernization Mechanical, electrical upgrades, interior upgrades,
retrofits and overhauls
Material Solutions Parts management, contract warehouse management,
global sourcing, component repair/upgrade, tech support

3
http://www.bombardier.com/index.jsp?id=1_0&lang=en&file=/en/1_0/1_4/1_4.jsp